Valuation of Mineral and Coal Assets – Challenges and ......As defined in the VALMIN Code (2015), mineral assets comprise all property including (but not limited to) tangible property,

Valuation of Mineral and Coal Assets – Challenges and Opportunities

SMEDGE24 January 2019

Caue ‘Paul’ AraujoSRK ConsultingSydney, [email protected]

Focus on Exploration and Mineral Resources

Content

• Introduction

• Codes, standards, guidelines and industry practice

• Common Valuation Methods

• Conclusions

Introduction

What is being valued?

Components of mining company’s share price:

• Mineral properties• Other assets and liabilities (e.g. cash and debt) • Commodity markets and general market sentiment• Quality of management• Market recognition and liquidity

IntroductionWhat is being valued?

As defined in the VALMIN Code (2015), mineral assetscomprise all property including (but not limited to) tangibleproperty, intellectual property, mining and exploration tenureand other rights held or acquired in connection with theexploration, development of and production from thoseTenures.This may include the plant, equipment and infrastructureowned or acquired for the development, extraction andprocessing of Minerals in connection with that Tenure.

IntroductionWhat is the purpose of the valuation?VALMIN Compliant/ Non-Compliant Valuations:• Value Opinion vs Full Valuation• “Technical Value” • “Market Value” of mineral properties• “Investment Value”• “Selling Value”• “Bidding Value”• Stamp Duty Disputes• JV Partners Disputes• Third-Party Opinion

Introduction

What is “Market Value”?

“Market Value” is the estimated amount (or the cashequivalent of some other consideration) for which the MineralAsset should exchange on the date of Valuation between awilling buyer and a willing seller in an arm’s length transactionafter appropriate marketing where the parties had each actedknowledgeably, prudently and without compulsion.

Introduction

What is “Market Value”?

• Value that would have been paid• Open and unrestricted market• Between informed and prudent parties• Acting at arms length

IntroductionProject development

stage Criterion

Early stage explorationMineralisation may or may not be defined, but where Mineral Resources have not beenidentified.

Advanced exploration

Considerable exploration has been undertaken and specific targets identified thatwarrant further detailed evaluation, usually by drill testing, trenching or some otherform of detailed geological sampling. Sufficient work has been completed on at leastone prospect to provide both a good understanding of the type of mineralisationpresent and encouragement that further work will elevate one or more prospects to theMineral Resource category.

Pre-development

Mineral Resources have been identified and their extent estimated (possiblyincompletely), but where a decision to proceed with development has not been made.Properties in the early assessment stage, properties for which a decision has beenmade not to proceed with development, properties on care and maintenance andproperties held on retention titles are included in this category if Mineral Resourceshave been identified, even if no further work is being undertaken.

DevelopmentTenure holdings for which a decision has been made to proceed with construction or production or both, but which are not yet commissioned or operating at design levels. Economic viability will be proved by at least a Pre-Feasibility Study.

OperatingTenure holdings, particularly mines, well fields and processing plants, that have been commissioned and are in production.

Source: VALMIN Code, 2015

IntroductionTypical information required for valuations:

• An independently validated tenement schedule outlining tenement number, area (in square kilometres), ownership (including mineral rights, clawback provisions, royalties, etc.), date of grant, date of expiry, taxes, rents, rates, minimum exploration expenditures, encumbrances, i.e. legal, Native Title, environmental, social

• Details of expenditure history (by tenement) to estimate the value of the exploration information

• Copy of any material agreements and contracts (i.e. service, joint venture, off-take, royalty)

• Any reports outlining recent exploration, such as annual reports• Reports outlining the potential of the tenements

IntroductionTypical information required for valuations:

• Any Mineral Resource estimates (either current or historical) or exploration target estimate

• Any test work and processing studies• Any mining, geotechnical, infrastructure or environmental

studies• Previous and/or current feasibility studies or technical studies• Any valuations or independent expert’s reports on actual or

adjacent properties considered relevant (i.e. within the last five years)

Interaction

Source: VALMIN, 2015

Interaction

Source: McCarthy, 2014

Codes & guidelinesTechnical Reporting Codes

• Provide minimum standards, recommendations and guidelines

• Principles of transparency and materiality in reporting

MaterialityAll reasonable information

expected

TransparencyClear, unambiguous presentation

CompetenceWork completed by Competent

Person

Reporting is subject to interpretation, therefore require greater transparency and consistency.

IndependenceMay be required depending on

circumstance

ReasonablenessImpartial assessment that a third

party would reach a similar conclusion

JORC (2012) & VALMIN (2015)

+ VALMIN (2015)

CodesReporting definitions

Don’t forget about:

• Development stages

• Timing

• Level of technical-economic study

• Level of confidence in all relevant factors, including SEG factors

• Transparent, consistent, balanced reporting

• “If not, why not” basisSource: JORC Code, 2012

Competence requirements

Membership

Member or Fellow of:• AusIMM• AIG• Recognised Professional

Organisation with an ‘enforceable code of ethics’

Experience

Technical Assessment:Minimum 5 years experience in

Technical Assessment

Valuation:Minimum additional 5 years (i.e. ten years in total) experience in

valuation of mineral assets

Familiarity

VALMIN & JORC Codes, Corps Act, ASIC/ASX policy & court

decisions

JORC (2012) & VALMIN (2015) + VALMIN (2015)

Experience

Minimum 5 years experience in:• Style of mineralisation or type

of deposit under consideration;and

• Activity which that person isundertaking

Valuation Approaches

Valuation Approaches

At least two valuation methods should be considered for each mineral asset.

Income Approach:• Based on expectation of income• Discounted cash flow method and variations

Market Approach:• Based on principle of substitution• Sales comparison/ comparable transactions

Cost Approach:• Cost of equivalent property• Appraised value method• Multiple of exploration expenditures• Geoscience factor

Valuation of Non-Producing Assets

Why Non-Producing Assets have value?

• They represent potential for eventual mineral production through

• Exploration discovery• Enhancement of existing mineral resources• Improved circumstances, (e.g. new roads or higher metal

prices)


Why Non-Producing Assets have value?

• New ownership• A market exists for non-producing mineral properties• With mineral resources or without mineral resources• Deals are commonly option or farm-in agreements


Most commonly used methods:

• Actual Transactions• Comparable Transactions• Joint Venture Terms• Past Effective Expenditure/ Prospectivity Enhancement

Multiplier (PEM)• Geoscience Factor (i.e. Kilburn Method) • SRK Geological Risk• Metal Transaction Ratio (MTR)• Yardstick/ Rule of Thumb Method

Comparable Transactions Analysis

• Commonly used in valuations for assets in any stage of development

• No true comparables – mineral properties are unique• Market size is small with relatively few transactions• Can use transactions on a number of similar properties to

obtain a range of values


• Complex property deals need analysis to obtain a value of the property

• Can adjust comparable transaction values by property area or by metal contained in resource

• Transaction date is very important since market activity and value change over time


Use similar characteristics to those of subject property:• Commodity or group of commodities, e.g. gold• Political jurisdiction• Location, access, infrastructure• Property size• Geological setting • Mineral deposit type• Stage of exploration and exploration potential• Exploration results and targets• Activity on neighbouring properties• Similar resource tonnage and grade, if any


Option Agreement Analysis/ JV Terms:• Analysis needed for valuation of market transactions• Most non-producing mineral property transactions are option or earn-

in agreements to earn an interest in the property• The option or earn-in period may last several years; three to four is

common• Earn-in terms include cash, stock, work commitments and royalties• Usually first year is firm and subsequent years optional• Option agreement terms analysis:

‒ Schedule of payments and work commitments‒ Estimate probability of realization of future commitments‒ Date of the agreement is the valuation date


Published description of the deal:X Resources can earn a 60% interest in a Rare Earths property of Y Corporation by making payments totalling $600,000 and expending a total of $2,500,000 on exploration over four years. The first year requires $50,000 cash on signing and an expenditure commitment of $250,000. Further optional annual payments and work commitments are shown in the following analysis table.

Prospectivity Enhancement Multiplier

• Based on the principle of “Past Expenditure”• A premium (or discount) multiplier is applied to the total

cost of exploration to date, depending on whether the exploration has enhanced the prospectivity of the ground or not

• Multiplier typically ranges from 0.5 – 3.0• Historical expenditures must be declared as audited• Issue – Subjective choice of multiplier value

Kilburn MethodRanking of appropriate factors applied to a Base Acquisition Cost (BAC). The BAC represents the average cost incurred by a Tenement Holder or Explorer to identify, apply for and then retain a unit area of the exploration licence of title (Goulevitchand Eupene, 1994), including statutory expenditure costs. The BAC forms the starting value from which a technical valuation range is then estimated.The factors used for the technical rating include Off-property, On-property, Geology and Anomaly factors. The ranking of these key factors will either enhance or reduce the intrinsic value of a property. A further factor, the Market factor, may then be considered in order to derive a Fair Market Value.

Kilburn Method

Source: Modified after Xstract, 2009 and Agricola Mining Consultants, 2011.

Geological Risk Method

Metal Transaction Ratio (MTR)

• Valuation of properties with more than one metal in the mineral resources (polymetallic deposits)

• Metal Transaction Ratio (MTR) is the ratio of the transaction value to the gross in situ “dollar content” of all metals in the resource

• Gross in situ “dollar content” uses metal prices as of the transaction date

• Analogous to $ per unit metal expressed as % of metal price

Yardstick / Rule of Thumb Method

Under the yardstick method of valuation, specified percentages of the spot price is used to assess the likely value. Commonly used yardstick factors as applicable to gold are:• Measured Resources - 2% to 5% of the spot price• Indicated Resources - 1% to 2% of the spot price• Inferred Resources - 0.5% to 1% of the spot price• Exploration Targets -

Valuation of Mineral ResourcesUse comparable properties for valuation:• Same commodity, e.g. gold, uranium, copper• Same political jurisdiction• Similar geological setting• Similar mineral deposit type• Similar size and grade of resource• Similar stage of exploration or development

Determine $/unit metal for market comparables:• Analyse transaction terms to get property value• Calculate units of metal in mineral resource estimate• Calculate $ per unit metal, e.g. $/oz Au, $/lb U3O8 or $/lb Cu

Analyse $/unit metal values to determine an appropriate range of values for the subject property.

Valuation of Producing Assets

Most commonly used methods are:

• Discounted Cashflow (DCF)/ Net Present Value (NPV Model)

• Real Options

• Comparable Transactions

• Option Agreement Terms

Conclusion

• Investors have access to an array of public information• Inconsistent use of reporting definitions, supporting

information/ project assumptions and outcomes may be confusing and even misleading

• Confirming the correct project development context is essential for assessing the risk, opportunity, relative confidence and value associated with a resource project

• Value of exploration and other non-producing mineral properties lies in their potential for hosting a viable mining operation

Conclusion

• Comparable transactions method works reasonably well using properties similar to the subject property

• Technical experience and judgement is a critical requirement for valuation of non-producing mineral properties

• Mineral property asset value is but one component of the value of a mining company and the share price

SRK Key Personnel - ValuationsJeames McKibben, BSc Hons, MBA, Chartered Valuation Surveyor (MRICS), MAusIMM(CP), MAIG – Principal ConsultantJeames McKibben is an experienced international mining professional having operated in a variety of roles including consultant, projectmanager, geologist and analyst over more than 24 years. He has a strong record in mineral asset valuation, project due diligence,independent technical review and deposit evaluation. As a consultant, he specialises in mineral asset valuations and IndependentTechnical Reports for equity transactions and in support of project finance. Jeames has been responsible for multi-disciplinary teamscovering precious metals, base metals, bulk commodities (ferrous and energy) and other minerals in Australia, Asia, Africa, North andSouth America and Europe. He has assisted numerous mineral companies, financial, accounting and legal institutions and has beenactively involved in arbitration and litigation proceedings. Jeames is a current member of the VALMIN Committee.

Caue Araujo, BSc (Geology), MBA (Project Management & Finance), MAusIMM – Principal ConsultantCaue Araujo is an experienced mining professional with skills and experience encompassing geology, commercial leadership, miningfinance and investment strategy, mineral economics, economic modelling and project management. Caue has participated in miningproject evaluations and technical due diligence (Mergers & Acquisitions), and Mineral Resource/Ore Reserve audits(NI 43-101, JORC, VALMIN and US SEC). He has prepared independent technical reports, exploration valuations and global strategicgeological exploration assessments across a range of geological environments and commodities. Most recently Caue held the roles ofGlobal Iron Ore Industry Director at the Australian Mineral Economics Group (AME) and General Manager SRK Consulting Brazil. Hehas in-depth knowledge of technical and commercial aspects of the iron ore industry, and significant exposure to other base metal,precious metal and industrial mineral deposits in Australia, Brazil, Canada, Africa and Russia. Prior to consultancy, Caue gainedexperience in iron ore open pit grade control, brownfield exploration target generation, geologic 3D modelling, long-term planning andISO quality internal audits while working for Vale S.A. in Brazil.

Steve Gemell, BE (Mining) (Hons), FAusIMM(CP), MAIME, MMICA – Corporate Associate ConsultantSteve Gemell is a professional mining engineer with over 40 years’ experience, having worked throughout Australasia and in North andSouth America, Africa, Asia, Europe and Oceania. He has been Principal of Gemell Mining Engineers, a multi-discipline consultancy,since its formation in Kalgoorlie in 1984. His experience includes operational management from shift boss to resident manager level,and supervision of open pit and underground mines, and CIP/CIL, flotation and alluvial processing plants. He has subsequently heldexecutive and non-executive directorships, including the positions of CEO and Chairman, in numerous listed mining and explorationcompanies, and was for some years a Visiting Fellow at the University of New South Wales.

SRK Key Personnel - ValuationsAnthony Stepcich, BEng (Mining), MSc (Mineral Economics), GDip (Finance & Investment), Dip (Technical Analysis), FAusIMM(CP) – Principal ConsultantAnthony Stepcich is a Mining Engineer with 22 years’ experience in the mining industry, having gained both underground and open-pit metalliferous experience, and open-pit coal experience. Anthony has postgraduate qualifications in finance and economics. He specialises in open-pit design and scheduling and project evaluations. Anthony is a Competent Person for the reporting of Ore Reserves in accordance with JORC Code (2012). Anthony is also an Expert in accordance with the VALMIN Code (2005) for the publicreporting of valuations across multiple commodities. Anthony has experience working in Australia and Indonesia.

Karen Lloyd, BSc(Hons), MBA, FAusIMM – Associate Principal ConsultantKaren Lloyd has more than 20 years international resource industry experience gained with some of the major mining, consulting and investment houses globally. She specialises in Independent reporting, mineral asset valuation, project due diligence, and corporate advisory. Karen has worked in funds management and analysis for debt, mezzanine and equity financing and provides consulting and advisory in support of project finance. She has been responsible for multi-disciplinary teams covering precious metals, base metals, industrial minerals and bulk commodities in Australia, Asia, Africa, the Americas and Europe.

Valuation of Mineral and Coal Assets – Challenges and OpportunitiesContentIntroductionIntroductionIntroductionIntroductionIntroductionIntroductionIntroductionIntroductionCodesInteractionInteractionCodes & guidelinesCodesCompetence requirementsValuation ApproachesValuation ApproachesValuation of Non-Producing AssetsValuation of Non-Producing AssetsValuation of Non-Producing AssetsComparable Transactions AnalysisComparable Transactions AnalysisComparable Transactions AnalysisComparable Transactions AnalysisComparable Transactions AnalysisComparable Transactions AnalysisProspectivity Enhancement MultiplierKilburn MethodKilburn MethodGeological Risk MethodGeological Risk MethodMetal Transaction Ratio (MTR)Yardstick / Rule of Thumb MethodValuation of Mineral ResourcesValuation of Producing AssetsConclusionConclusionSRK Key Personnel - ValuationsSRK Key Personnel - Valuations

Documents

Valuation of Mineral and Coal Assets – Challenges and ......As defined in the VALMIN Code (2015), mineral assets comprise all property including (but not limited to) tangible property,